Fed’s Hawkish Pause And China Rate Cut Paints Mixed Picture For Global Markets

Published on
  • China cuts medium-term rates on back of weak economic outlook.
  • FTSE 100 ticks down 14 points.
  • US Stocks broadly flat following mixed messaging from Federal Reserve.
  • Brent crude ticks up after yesterday’s losses.
  • Molten Ventures cautiously optimistic after challenging year for venture capital.

Fed Pauses Rate Hikes

“The Fed’s decision to pause rates at the 5.0% to 5.25% range yesterday were met with a luke-warm reception, largely due to the hawkish tone set for the rest of the year. London’s FTSE 100 has opened down about 0.2%. Sector wise, Electronics, Beverages, Mining and General Industrials were the biggest losers. 

The S&P 500 hardly budged, while the tech led NASDAQ composite added to its recent outperformance with a 0.39% gain. Markets had been pricing in this stance and will now be bracing for further rate rises, with the likelihood of a couple more hikes this year to meet the US Central Bank’s terminal rate forecast of 5.5% to 5.75%.

With UK inflation rates still more than double that of the US, it would be harder for Threadneedle to take a similar pause next week after 12 consecutive rises. 

People’s Bank of China Cuts Rates

Asian markets fared better overnight as they digested a small cut by the People’s Bank of China to short term lending rates. That’s been followed today by a 10 basis point drop in medium-term rates to 2.65%, and next week the benchmark Loan Prime Rate may well follow suit.

There are real concerns emerging that the anticipated post-COVID recovery in the world’s second largest economy is failing to materialize. Retail sales and industrial production numbers out today both fell short of expectations and youth unemployment hit 20.8%, the highest number since records began 5 years ago. The Shanghai Composite is up about 0.7% with Hong Kong’s Hang Seng trading ahead by about 1.6%. 

It’s been a topsy turvy week for oil prices, rallying strongly on the initial news of Chinese rate cuts, and giving up most of those gains yesterday following the Fed’s mixed messaging. Brent crude was down by over a dollar per barrel, flirting with the $73 level, but is up around half a percentage point today. 

Molten Ventures Cautiously Optimistic

Full year results from the venture capital house formerly known as Draper Esprit, Molten Ventures, reflected the challenging environment for European start-ups and scale-ups. The portfolio suffered a 16% decline in fair value and exit proceeds more than halved. CEO Martin Davis noted the slowdown in both M&A activity, and the effective closure of the IPO market.

Gone is the era of growth at any cost with “investors focusing on how companies manage costs, lengthen cash runways, or offer routes to profitability in a tough financing market.” Molten Ventures is cautiously optimistic for the year ahead as the technology markets continue to stabilize and recover in places.” 

Article by Derren Nathan, head of equity research, Hargreaves Lansdown